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The 10 funds highest in after-tax returns offer quality appeal

When scouting out mutual funds for an investment in a taxable account, investors sometimes do a funny thing: They look at pretax returns. Strange that they wouldn't look at after-tax returns since Uncle Sam has a seat at the table when you invest in a taxable account.

After-tax returns are readily available in fund reports and at Morningstar.com. You can even look at figures that show what your returns would have been assuming you held on to the fund beyond the time period in question or if you had sold at the end of the period.

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Today, I'll take a look at the 10 funds with the highest 10-year after-tax returns (before sale). Will they match those returns over the next 10 years? Not a chance. However, many of these funds do have appeal. Most have long-tenured managers and low portfolio turnover, among other attractive qualities. In all, this is an above-average group.

1. Vanguard Health Care: Ten-year annualized after-tax returns: 17.78 percent.

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This is one of the best sector funds around because it avoids most of the baggage associated with sector funds. It has low turnover and a low expense ratio in a fast-trading, overpriced field. In addition, the fund boasts a long-tenured manager and a sober hype-free strategy. Manager Ed Owens is working on his 20th year at the helm, and his attention to fundamentals has guided the fund through the inevitable boom and bust years that afflict health-care stocks. (By the way, you need $25,000 to join the fund.)

2. Calamos Growth A. Ten-year annualized after-tax returns: 15.32 percent.

The Calamos' balance-sheet-oriented approach keeps them from getting carried away with over-leveraged or over-hyped stocks. The managers sell a stock once it has reached their estimate of fair value. Thanks to that discipline and plain old good stock-picking, the fund has managed to outgun the mid-growth category in up markets and down. The only real drawback is that its 1.50 percent expense ratio is on the pricey side.

3. Legg Mason Value Prime. Ten-year annualized after-tax returns: 15.30 percent.

The stock market is back and so is Bill Miller. During the bear market, Miller managed to lose less than the S&P; 500 each year, but he wasn't nearly as impressive as he was during the bull market. Now, though, he's rocking. The fund's up more than 20 percent, which is 8 percentage points ahead of the S&P; 500. Stocks like Amazon.com and Nextel, which caused the fund a lot of grief during the bear market, have put up huge gains. Miller's unique approach is to seek out companies that are cheap relative to their likely value many years out. As a result, he buys fast-growing companies along with battered deep-value plays.

4. Eaton Vance Worldwide Health Sciences A. Ten-year annualized after-tax return: 15.18 percent.

Manager Sam Isaly takes a buy-and-hold approach to investing in biotech and other small health-care names. The direction of those companies changes so fast, you'd think it couldn't work. Yet Isaly, who has run the fund since 1989, has shown he knows how to pick stocks in even the most treacherous spaces. Too bad the fund charges a steep 1.67 percent for the A shares.

5. Excelsior Value & Restructuring. Ten-year annualized after-tax return: 14.74 percent.

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Manager David Williams is one of the best there is; yet few people have heard of him. As the fund's name says, Williams buys undervalued companies that have sound restructuring plans to get back on track. He has made some great calls on stocks and sectors though his bold style sometimes has hiccups.

6. Mairs & Power Growth. Ten-year annualized after-tax return: 14.61 percent.

Co-manager George Mairs is going out on top. He's set to retire at the end of the year, and he has made many investors wealthy. Along with co-manager Bill Frels, Mairs has made a killing using a focused portfolio of well-run companies trading at reasonable prices.

7. Fidelity New Millennium. Ten-year annualized after-tax returns: 14.50 percent.

This week Fidelity dropped this fund's sales charge, but it is still closed to new investors. Manager Neal Miller, who has been around since the fund was launched, employs theme-based investing to build a crazy quilt of ideas and stocks. It shouldn't work, but it does.

8. Smith Barney Aggressive Growth. Ten-year after-tax returns: 14.45 percent.

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Like Owens and Isaly, manager Richie Freeman is a buy-and-hold growth investor. Freeman buys well-run small- and mid-cap companies with attractive growth prospects and then he holds on. He has got Intel shares that date back to the Mesozoic era. Freeman's favorite team, the Mets, is a long way from first, but this fund has already wrapped up the pennant.

9. Fidelity Select Home Finance: Ten-year after-tax returns 14.24 percent.

And, 10. Fidelity Select Electronics: Ten-year after-tax returns 14.22 percent.

The story with the last two is similar. Fidelity made good stock picks over the past decade, and they've boosted these funds to great returns. That's despite the fact that managers change frequently, and the funds come with a 3 percent sales charge even though they're bought directly. Fidelity has scores of industry funds, so luck alone would account for one of their Select funds making the top 10. We'll give them credit for the other one, though.


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